06 February 2019 by Sonia Sharma
The chairman of the Wates Group, talks to Governance and Compliance about the new Wates Corporate Governance Principles for Large Private Companies
On 10 December 2018, a new code for the corporate governance of large private companies was launched. The framework aims to help them meet their obligations under The Companies (Miscellaneous Reporting) Regulations 2018, in addition to promoting long term success in this vital sector.
The framework was needed because the government green paper in 2016 on corporate governance recommended that private companies should report on their governance, which they had not done previously. My immediate concern was we were going to get heavily regulated by government and that would impact on the inherent entrepreneurialism and flexibility that private businesses have.
I was then approached by the IFB, on behalf of the coalition group that was put together in response to it, as to whether I’d like to chair it. And after a bit of consideration and talking it through with my partners in the business, we decided it’s better to be trying to influence and then shape things rather than be on the outside and getting something that you didn’t want. That’s why I got involved.
Fundamentally, it’s because – and I’ve said it many times – that good business well done is a force for good in society. So it was a question of stepping up, really. We were very clear when the coalition group met and then started to develop its thinking that we didn’t want to have anything that was more restrictive than the listed companies’ code. On that basis, we said what we really want to do is create some high-level principles that private businesses can aspire to.
Although these principles are there for major private companies, it’s a framework that good companies would follow anyway because it makes sense. It was very much a principle-based thing rather than a code. It was about applying and explaining rather than ticking a box to comply. And I know we’ve achieved that, and I think the response to the principles through the consultation has been very good as the result.
There are six principles. So we’ve got the North Star, which is the purpose and leadership; and everything flows from that. If you can define your purpose as a company, then that guides everything else that you do. Supporting that, you’ve got to have a strong board, particularly in private ownership where you might have a very dominant shareholder. You need to have, in my view, a balanced board, a strong board with a mix of owners, independent non-executive directors, and executives.
“I think there is an awful lot of risk-based box ticking in governance”
I would say that that balance works really well for us and has done for 30 odd years, so I can see huge benefit in that. The other thing that I think is very important is directors understanding their responsibilities. And that’s particularly relevant for directors of privately-held subsidiaries of either overseas corporates or even listed companies in this country, who might not think they have the same responsibilities as directors, but actually under the law, they do.
Having clear definition of directors’ responsibility, I think, is very important. But what we didn’t want to do, and we absolutely have not done, is interpret section 172 of the Companies Act. What we’ve done is to make sure that the guidelines we have put in place help people to understand what their responsibilities are. And then the final pieces of the jigsaw really are opportunity and risk and I was very keen that we didn’t just focus on risk.
I think there is an awful lot of risk-based box ticking in governance. And again, going back to the entrepreneurialism of private businesses, we wanted to really encourage that, so we actually had an opportunity and risk principle. It is about thinking of the long-term opportunities, and what you’re trying to do with the business going forward. We had to consider remuneration because that was one of the primary drivers of the legislation for governance reporting by private businesses.
Again, we didn’t want to put a price tag on people and require a full remuneration report. But actually, we wanted to put in place the philosophy and policy that a company has with regard to remuneration, taking cognisance of its sector, its peer group and its performance. We did this because, unlike PLCs where shareholders can tend to be quite a distance away from what’s going on, in most private companies their shareholders are very close to what’s going on. They stay really close and they know what performance is.
The final piece of the jigsaw is stakeholder engagement, which is the one where we spent a lot of time. It’s all circular, but I think this is probably the most important one because that’s where we do talk about how we engage with our clients, with our customers, with our shareholders, with the communities in which we operate, with our workforce and with the supply chain.
I think it’s very important that you have a proper engagement, as a business, with the people you’re interfacing with, and again, section 172 doesn’t just refer to shareholders. It also refers to stakeholders and I think we capture that very well in principle six.
What would you say to people in large private companies who believe that the principles are merely a form of bureaucracy or excessive regulations?
I would say people who have that mindset are not looking at it in the right context. This is not about bureaucracy. It is about giving people a framework against which they can satisfy the law because the law is in place from 1st January 2019. People have to respond to it. Whether they want to or not, they’re going to have to. What we’ve come up with is something that gives a simple framework that would be good practice in any business.
I suspect most companies do it in some way, shape or form anyway and this puts a framework around it. People can then articulate against what they do.
I think we’ve got the emphasis right on stakeholders. It was the area that the coalition probably spent more time on than anything else debating to get the emphasis right. Because you’re trying to be all things to all people in that particular principle and that’s a real challenge. But I think we’ve got the balance about right. There is no shareholder primacy, it is about how good companies engage with a wide stakeholder base.
“There is no shareholder primacy, it is about how good companies engage with a wide stakeholder base”
If you’re doing that, you’ll be a better business because you’re listening to your customers. You’re listening to your workforce. You’re listening to the communities you’re serving and if you don’t do that, then how can you possibly be delivering what they want?
My instinct would be that most companies that are within scope of the legislation would have a company secretary. I think the role of the company secretary is important in terms of making it simple, having an ear during board meetings to the principles and at the end of the board meeting, jotting down the one or two things that might have been discussed at that board that actually do deliver against the principles.
So when you come to do your annual year-end report, you can actually quite easily demonstrate what you’ve been doing. Because for good companies, these principles are not asking people to do anything they don’t normally do in their business. They’re actually just asking people to say what they’ve done. And if you think about it all the way through, it’s much easier than scratching your head at year-end at that time, saying, ‘what did we do about that?’
There should be a focus on ‘what we do’ rather than ‘what we’ve done’ which I think is a very important part of this and the role of the company secretary is going to be very important in that.
Every company has to make its own decisions. And again, during the development of the principles that is something that we were very keen to recognise – that no two companies are the same. The drivers of different companies in different sectors will be different and how they go about their business is something that we should not prescribe.
I happen to believe there’s a real benefit in company secretaries. It allows the directors to focus on what they’re doing around their business and the company secretary is there to support and advise and, of course, record; and that is a very, very important role. If somebody else has that responsibility around the board table, can they really give the real level of thought to the businesses or indeed the other aspects of corporate reporting; so the company secretary has a huge role.
I will give the same answer I’ve given every time, which is if people are determined to do something, no principles and no code will stop them. What these principles do and I think what codes generally do, is allow people to hold up a mirror to themselves, particularly when you’ve got a board of directors. It comes back to the composition of the board because they’ll have different responsibilities and they will challenge a dominant personality and say, ‘actually, we can’t be doing that. It’s not right’.That, I think, is where principles and governance really work.
If you want to make it a burden, it can be a burden. I see it as an opportunity. These principles will hopefully allow people to present themselves. As I said at the launch, I’m fundamentally a sales guy. I love promoting and selling my business and anything that gives me a chance to do that, to set me apart from my competitors, I want to do. I’m hoping that these principles will allow me and my business to be judged in the context of our competitors and be seen to be maybe a little bit better.
No two companies are the same and I’ve noticed that in the world of family businesses. There’s a huge amount of sharing and learning that the Family Business Network undertakes and what you recognise is whilst some of your problems are unique to yourself in detail, in principle they’re the same across the sector. There’s a huge amount of sharing in the family business world about the issues we face.
“People will first see the light of these principles as they apply to the Wates Group, which we’ll be reporting on in our 2018 accounts”
You actually pick and choose little bits of learning from other companies in order to get better; and to some extent, I hope that will start to come through in these principles. That people will be able to look across the spectrum, look at other companies, how they do things and actually see what good looks like and then deliver against it.
People will first see the light of these principles as they apply to the Wates Group, which we’ll be reporting on in our 2018 accounts. However, the legislation doesn’t require companies to report on governance until the 2019 financial year. So it’ll be in the 2020 reporting cycle where we will start to see a number of companies reporting against the principles and it’s about what happens next, how they’re going to be monitored and how they’re going to then be assessed.
I think people will look at the principles over a three to five-year period when there has been some turns of the wheel. They can then look at how the principles are working and see what good is looking like. Companies can’t just put these on a shelf and say ‘that’s that box tick for another ten years.’
I then hope that they’ll actually use them as a base to improve and move forward. Because one thing’s for sure, if they stand still, they’ll go backwards. These principles have to be alive.